UBS rocked by $2 billion rogue trader loss

UBS AG (UBSN) may be unprofitable in the third quarter after a $2 billion loss from unauthorized trading at its investment bank, the Swiss banking giant said today. Kweku Adoboli, a 31-year-old employee who served as a director of exchange traded funds and Delta 1 trading, was arrested early this morning at UBS’s London office on suspicion of fraud by abuse of position, according to inside sources.

The loss essentially cancels out a 2 billion Swiss franc ($2.3 billion) savings that the firm hoped to gain through cost-cutting measures announced last month tied to the elimination of 3,500 jobs.

The bank held 37.39 billion francs in tier1 capital at the end of the second quarter, giving it a tier 1 capital ratio of 18.1%. That compares to a 14% ratio at Deutsche Bank AG, Germany’s largest bank.

The incident further threatens the future of UBS’s investment bank, which is under scrutiny by chief executive Oswald Gruebel in the wake of heavy credit card losses and charges relating to bankers helping wealthy U.S investors dodge taxes.

The firm aims “to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened,” Gruebel said in a memo to staff today.

“This is a staggering demonstration that all the clever systems that the banks now have, especially after the financial crisis, still cannot stop a determined individual getting round them if they want to,” said Chris Roebuck, visiting professor at Cass Business School in London.

UBS said no client positions were affected by the incident. The firm is scheduled to host an investor day on November 17 where it is expected to announce a major restructuring of the investment bank.

Mr. Adoboli, a 2003 a computer science and management graduate of the University of Nottingham, was described by a former landlord as a good tenant who paid 1,000 pounds per week ($1,600) for an apartment in London’s East End.

“It shows that investment banking is a risky business and that it is important that systematically relevant functions are clearly separated from the rest of the banking business,” parliamentary leader Caspar Baader said on Swiss television.

UBS shares fell 11% to 9.75 francs on the news, and are down 36% for the year.